This week a conference will be held in London under the title ‘Iraq Refinery 2012'. The Ministry of Oil is sending a high level delegation to the conference and said in a letter to the organisers that it "will use this event as an occasion to present the programme for planned future refineries, the redevelopment of the existing refinery infrastructure, and our strategy for the redevelopment of the refining and petroleum industry in general. The Ministry will use this event to engage in constructive dialogue and exchanges for effective collaboration and joint venture opportunities."
For some time now, Iraq has repeatedly stated that it intends to build four modern and complex refineries with a total capacity of 750 thousand barrels a day and is apparently using the occasion to promote private investment in these refineries.
A few years ago, Iraq promulgated a law allowing private investment in refineries and amended the law to give investors a 5 percent discount on crude oil in addition to other incentives and a guarantee to buy the products at international prices, while allowing the investor to export surpluses.
Iraq also went ahead in almost completing front end engineering and design (FEED) with a cost running in tens of millions of dollars for each refinery. Yet no interest was shown so far by any investor and it is unlikely that any will come forward in the short term.
There is no doubt that Iraq needs to expand its refining industry though, in parallel, priority should also be given to rehabilitating, modernising and expanding the processing of existing refineries to rid them of the heavy end of the barrel and reduce the crude oil needed to satisfy the demand.
The capacity of existing refineries stood at about 700,000 barrels a day in 2002 but now is at 800,000. But these refineries keep working on average of 65-70 per cent of capacity and sometimes less for various reasons ranging from refinery status or local conditions and the general situation in the country since the occupation.
Therefore, to satisfy domestic demand, Iraq resorted to importing large quantities of light petroleum products as early as 2003 when it was actually exporting substantial amount of products in 2002.
In the years 2004-2011, Iraq imported on average 3.7 million tonnes a year of light products such as LPG, kerosene, gasoil and especially gasoline. The total imports since 2003 may be more than 30 million tonnes at a cost running into billions, which would have been more than sufficient to finance the expansion of the existing refineries and build at least two large-scale modern ones.
Rising gasoline imports
The trend of imports is on the rise and is likely to continue for some time to come. The Ministry of Oil itself estimates that gasoline imports in 2014 could be as high as 47,000 barrels a day or over two million tonnes a year.
The ministry, however, believes other products will be in slight surplus but this is doubtful and more imports will be forthcoming. The problems with imports are not just the cost associated with them but the huge logistics problem of importing through a single-entry point in the south and delivering the products throughout the country.
At the same time the import facility is a makeshift arrangement and Iraq needs to have a proper and independent arrangement for this operation, which can be used for exporting products when conditions improve.
If Iraq is intent on privatising the refineries, the question may be asked why the ministry did not include this programme as a factor when it awarded many fields and a huge portion of the country's reserves to international oil companies.
For private investors, refinery investment is difficult in the best of circumstances due the limited margin of profit most of the time. But for a government in an oil-producing country there are many advantages in building these refineries to secure the demand for oil products, provide employment, improve infrastructure and introduce new skills and technology which can spill over to other sections of the economy.
Iraq only has to look to the progress made in some neighbouring countries which have adopted similar programmes.
Iraq has to face the responsibility of at least building the first refinery expeditiously using its own resources. At the same time the site selection of the new refineries appears to have been influenced by a desire to please local governments rather than satisfy an optimum objective for the whole country. This has to be reviewed while there is still time.
Former head of Energy Studies Department in the Opec Secretariat in Vienna.